Seller's Financing—Opening the Door to a Closing

... From Biz2Biz NWA February 2009

Part Two: Buying and Selling a Business

By Tami Greever / Crye-Leike / Bentonville

Are you thinking about buying a new job? That is starting or purchasing a business. It’s not uncommon for us to think about being our own boss when being laid off or facing an industry-wide downsize. Or maybe the time has come to stop dreaming and start doing.

On the other hand, maybe you’re considering selling your job– selling the business you’ve worked hard to build. Maybe you’re retiring, changing your lifestyle or moving out of the area.
Either way, the business of buying and selling a business is an exciting industry. The number of people launching their own business has never been higher and may even skyrocket in the next few years because of big-business economics. Studies show that women are extremely active entrepreneurs – 350,000 women launch a business every month in the U.S.

Now, more than ever, buyers depend on a variety of financial doors swinging wide open. The scenario is this: Buying a business to replace a lost job isn’t going to secure traditional financing. As lending criteria intensifies, buyers who can’t demonstrate sufficient experience, collateral, or optimal credit are ripe for rejection. At the same time the buyer is struggling to show worth, the seller may not qualify due to a lack of assets, sufficient proof of cash flow, or a myriad of other reasons for financing frustration.

In fact, statistically, only 20% of businesses ever sell. Not surprisingly, financing is the biggest hurdle to overcome. And now, as the SBA further tightens qualifications– seller financing has never been as essential. Indeed, seller financing is rapidly becoming the norm.

When buyers and sellers find the door slamming, what is the key to unlocking that financial door? Seller financing.

The Business Brokerage Press survey revealed that seller financing options accounted for more than one quarter of the purchase price for small business sales in 2007. The savvy seller may want to consider a 20/60/20 ratio–
• 20% down payment from buyer
• 60% outside financing
• 20% of the remaining offered in seller financing.

Pundits suggest that outcomes tip in favor of the deal when both buyer and seller place “skin in the game.” Sellers may think twice before overburdening the new business-owner with financial obligations. The buyer may carefully consider the ramifications of nonperformance– the risk of losing a significant down payment coupled with collateral, usually their home. Another bright spot is that by deferring payment, the seller may be able to defer tax implications, enjoy incremental interest payments, and perhaps command more return than what would have been possible with traditional financing.

Of course, the seller should consider what remains of the business should the buyer fail before final payment. And, it’s always advisable for both sides to seek legal advice when structuring a financial agreement.

Bringing the seasoned small business owner together with the small business seeker may take more creativity in an economic downturn, but structuring a win-win exchange is possible. Whether you find yourself as a buyer or a seller, prepare yourself for calculated risk, new opportunity and financial creativity. Deals are bought and sold—they don't just happen!

Author/ expert Tami Greever is a seasoned entrepreneur and Business Broker/Realtor® pioneering with Crye-Leike Commericial in Northwest Arkansas, her home of 18 years.